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CEO overconfidence and corporate risk taking: Evidence from pension policy
Author(s) -
Goldberg Cathy S.,
Graham Carol M.,
Ha Joohyung
Publication year - 2020
Publication title -
journal of corporate accounting and finance
Language(s) - English
Resource type - Journals
eISSN - 1097-0053
pISSN - 1044-8136
DOI - 10.1002/jcaf.22470
Subject(s) - overconfidence effect , pension , equity (law) , business , proxy (statistics) , monetary economics , corporate finance , volatility (finance) , accounting , economics , actuarial science , finance , psychology , social psychology , machine learning , political science , computer science , law
We examine the relationship between managerial overconfidence and corporate risk taking. More specifically, we investigate how overconfidence affects the risks that CEOs take in managing their firm's pension plans. Using both options‐based and firm‐based measures to proxy for CEO overconfidence, we find that overconfident CEOs are more likely to take on greater risk in managing their pension plans by increasing the amount of pension assets invested in equities and the volatility of the pension fund. Our results are significant in the post‐global financial crisis of 2008 during a period when data indicates average equity allocation in pension assets decreased thus highlighting that overconfident managers behaved contrary to the overall market. This study adds to the literature on both managerial overconfidence and its consequences, and on the drivers of corporate pension policy.